After labelling, EU think-tank proposes banking steps on Israel

JERUSALEM, July 22 (Reuters) - The EU agreed this week to
push ahead with introduction of labels that specifically
identify Israeli goods made in settlements in the occupied West
Bank, a policy that has angered Israel; but now an influential
European think-tank is proposing going much further, including
the targeting of Israeli banks.

The European Council on Foreign Relations, which frequently
informs EU policy, argued in a paper on Wednesday that the EU is
in breach of its own laws. It had to go further to distinguish
its dealings with Israel from Israel's activities in the West
Bank and East Jerusalem, which it has occupied since 1967.

European diplomats have long said that labelling - to make
clear the goods originate in settlements - is only the first in
a series of steps the EU could take against Israel over its
settlements policy, one that in financial terms is expected to
have a relatively minor impact on the Israeli economy.

But the new proposals would go much deeper and further,
reaching into banking, loans and mortgages, qualifications
earned in settlement institutions and the tax-exempt status of
European charities that deal with Israeli settlements.

European Union officials have talked in private about the
steps that might follow labelling, but there are no formal
European Commission proposals in the works at this stage.

"Under its own regulations and principles, Europe cannot
legally escape from its duty to differentiate between Israel and
its activities in the occupied Palestinian territories," says
the report, titled 'EU Differentiation and Israeli Settlements'.

The authors argue that by pushing much further to separate
the EU's dealings with Israel from the settlements, it will
force Israel to decide what sort of relationship it wants with
Europe and in turn encourage it to return to talks with the
Palestinians on a two-state solution to the conflict.

FINANCIAL SQUEEZE

The most significant proposal is on banking, where large
Israeli institutions have daily dealings with major European
banks, while also providing loans and financing to Israeli
businesses and individuals based in the settlements.

Under European Commission guidelines from 2013, EU- and
member-state-funded lending cannot be provided to Israeli
entities operating in the occupied territories. While not
legally binding on EU states, the guidelines have an influence.

"Do day-to-day dealings between European and Israeli banks
comply with the EU requirement not to provide material support
to the occupation?" the report asks, saying it is an issue that
EU member states have yet to resolve.

The issue extends into loans and mortgages. An Israeli with
dual European citizenship should, in theory, not be able to use
a settlement property as collateral for a European loan since
Israeli-issued property deeds are not recognised.

Another area in which the EU may be in violation of its own
rules relates to qualifications from academic, medical and other
Israeli institutions based in the West Bank given that it does
not recognise Israel's sovereignty over the territory.

Likewise, there is a question mark over whether the EU
should be dealing with Israeli institutions - such as the
Ministry of Justice, the building ministry and the national
police headquarters - which are based in East Jerusalem.

The Israeli government has described Europe's steps on
labelling as discriminatory and wrong-headed, suggesting they
are akin to the Boycott, Divestment and Sanctions (BDS)
movement, which Israel regards as anti-Semitic.

Prime Minister Benjamin Netanyahu raised his concerns about
labelling in a meeting with the EU's foreign policy chief,
Federica Mogherini in May. Mogherini raised the issue of the EU
further differentiating its dealing with Israel.

Mattia Toaldo, one of the authors of the ECFR paper, said
the EU needed to explain more clearly the legal obligation the
EU faces when it comes to differentiation, making a sharp
distinction with the BDS campaign. And the ultimate aim, he
said, should be to urge Israel towards a two-state solution.

"Differentiation is a legal prerequisite for the EU in order
to avoid violating its own laws," he said. "You have to do it
legally and by the book, but it is also beneficial to the peace
process because it changes the calculations by the Israelis."
(Writing by Luke Baker; editing by Ralph Boulton)